Q1 2022 Market Review – Crisis Fatigue

Introduction

It’s been an emotional 2 years of global events, certainly for us Brits that have chosen the U.S. as our new home. A global pandemic, the 2020 election and resulting Capitol riot, inflation figures not seen in 40 years, and war across eastern Europe with no near end in sight – to name only a few.

You’d be forgiven if you’ve been experiencing crisis fatigue, I know I have.

The world feels at a tipping point, and you don’t have to tune in to the news for long without some TV pundit crying out for the next recession to add further gloom to your morning coffee.

In light of this, and from a number of client conversations we’ve had so far this year, I wanted to focus this quarter on the current crisis and how we came out of similar crises in the past.

Be sure to read to the end where we take a look at our 61% equity portfolio to see how we’ve held up over the quarter and last 12 months.

• Before I start let me remind you of our ‘general principles’ to investing; You and I are long-term, goal-focused, planning-driven equity investors. We’ve found that the best course for us is to formulate a financial plan—and to build portfolios—based not on a view of the economy or the markets, but on our most important lifetime financial goals.
• Since 1960, the Standard & Poor’s 500-Stock Index has appreciated approximately 70 times; the cash dividend of the Index has gone up about 30 times. Over the same period, the Consumer Price Index has increased by a factor of nine. At least historically, then, mainstream equities have functioned as an extremely efficient hedge against long-term inflation and a generator of real wealth over time. We believe this is more likely than not to continue in the long run, hence our investment policy of owning successful companies rather than lending to them.
• We believe that acting continuously on a rational plan—as distinctly opposed to reacting to current events—offers us the best chance for long-term investment success. Simply stated: unless our goals change, we see little reason to alter our financial plan. And if our portfolio is well-suited to that plan, we don’t often make significant changes to that, either.
• We don’t believe the economy can be consistently forecast, nor the markets consistently timed. We’re therefore convinced that the most reliable way to capture the long-term return of equities is to ride out their frequent but ultimately temporary declines (“The key to making money in stocks is to not get scared out of them” Peter Lynch).
• The news cycle reinforces uncertainty. We believe that uncertainty – in the markets and indeed the World – is the only certainty. We don’t seem to move from periods of uncertainty to periods of certainty; rather we move from one uncertainty to the next. Thus, we encourage our clients to embrace “rationality under uncertainty.”
• The performance of our equity portfolios relative to their benchmark(s) is irrelevant to investment success as we define it. (It is also a variable over which we ultimately have no control.) The only benchmark we care about is the one that indicates whether you are on track to achieve your financial goals.

Quarter by Numbers

First, let’s look at some of the key global markets over the first three months of 2022.

Global equities, as measured by the MSCI All Country World Index (USD) fell by 5.26%. Most developed and emerging markets fell over the quarter with the UK FTSE-All Share being the most notable ‘winner’ over the quarter at +0.5%, buoyed by an oil-heavy index.

Within the world of bonds, Barclays Global Aggregate, which is an index comprising of global fixed income; government bonds, corporate bonds, other asset back securities; mortgages, car loans, finished the quarter -6.2%, following on from a difficult 2021 performance of -4.7%.

Therefore a portfolio composed of global equities and global bonds should return between -5.26% and -4.7% for the quarter.

Why are my bonds falling?

Bonds are not averse to falling in price. Bond prices rise and fall on a daily basis due to interest rate policies and world events, just like your equities.

What you should know is when interest rates rise, bond prices fall. To use a simplistic example:

Let’s say the US government issues 10-year bonds today at 2%. Then the following month, interest rates increase and the US government issues new 10-year bonds at 2.5%.

As a result, the prices of the 2% 10-year bonds would typically fall because they are less attractive. Why buy a bond paying 2% interest when you can buy one today paying 2.5%?

Over time (long term, 10 years+), bonds are generally less volatile than stocks, which is one reason we hold them. Another is that they rise and fall in different patterns to stocks, so they are a diversifying asset which smooths out the volatility over the long term, and they also provide dividends or income.

Inflation

The headlines have been alarming. Last month, the U.S. inflation rate experienced the largest spike since December 1981. The Commerce Department’s basket of consumer products was 8.5% more expensive in March than it was a year earlier.

Before anyone becomes too alarmed, you should know that half of that increase came at the gas pump, the aftermath of the energy disruptions associated with the ongoing war in Ukraine. Since then, gas prices have come down a bit, and there is no good reason to imagine that the pain at the pump is permanent.

Part of the reason economists fear inflation is the mindset it creates. When workers and companies see prices going up, they prepare for it by demanding higher wages and higher prices for their products. Barbers and massage therapists ask for a few dollars more for their services, and then a few dollars more because everybody else has raised prices—and so it goes. Suddenly—and nobody knows exactly where or how we cross that threshold—inflation becomes a self-fulfilling prophecy. And these cycles can be very difficult to stop.

War in Ukraine

At a time when many investors have become antsy about the U.S. stock market, one thing we did not need was an aggressive military incursion in Europe. But that’s what we got this quarter, and as the Russian annexation of parts of Ukraine dominated the headlines, it is drowning out any positive news about the actual companies being traded. You are probably not hearing that earnings for companies in the S&P 500, in aggregate, rose 22% in the prior quarter, or that overall economic growth in the U.S. continues to be unusually robust.

NATO is more coordinated than ever to reduce its reliance on Russian gas, spend more on defence budgets, and continue to issue sanctions on Russia. Putin will need a victory to validate the invasion in the eyes of the Russian public, and what this manifests as we simply don’t know. How the market reacts over the coming weeks and months as negotiations undoubtedly fail along the way, we can’t predict —taking some small comfort in the fact that nobody else can either.
What we can be sure of is, this too shall pass…

How we overcame prior crises

As we can’t look into the future to predict what happens next, we instead turn to the past to teach us about how that impacts the companies we own in our pensions and investments.

• The S&P 500 closed this quarter at 4,530.
• During the 1987 market crash, which is the largest one-day fall in history, the S&P 500 closed the week before at 283.
• The day before 9/11, the S&P 500 index closed at 1,093.
• The Friday before the Lehman Brothers bankruptcy in 2008, the S&P closed 1,252. What came next needs no introduction.
• At the start of the 2020 Pandemic, on February 19th, prior to the stay-at-home orders, the S&P 500 closed at 3,386.

These events were earth-shattering. Fear of what came next led investors to sell investments, markets were in free fall and the world changed overnight.

Afterward, the economy healed, human ingenuity continued, and companies began to innovate and grow once more.

We continue to have blind faith that this rightful path will repeat itself through these crises and the ones yet to come. And as we hold these companies through our diversified portfolio approach, we will ride through the volatility and not change our investment plan because some TV personality tells us this time it’s different.

PFW Managing Money

Here’s a summary of the discussions and changes made by our Investment committee:

• Review of the PIMCO Global Investment Grade Credit Fund in our overseas (QROPS/SIPP) portfolios Early discussions on PFIC free QROPS portfolios
• Meeting with PIMCO to discuss alternative global currency hedged bond solutions for overseas portfolios
• Review global bond exposure in our PFIC-Free US portfolios
• Monthly reviews on all portfolios across US and Europe in light of inflation and market volatility

Strategy Deep Dive

At PFW our portfolios are characterized by massive global diversification across geography and asset classes, we invest in equity mainly via passive index funds, construct our portfolios with cost in mind, design our portfolios and your investment plan to hold up in good times, and in bad.

Total Return I USD (TR1) – SIPP/QROPS Pensions

We have 9 risk-adjusted strategies, TR1 is number 6 of 9 (1 = low risk, 9 = high risk).

Where is this invested?

• 61% in global developed market equities and bonds, mostly held in tracker (ETF) funds.
• 34% in global government and corporate investment grade bonds and debt
• 5% in cash.

Q1 2022 performance of Total Return I USD = -7.16%*

1-year performance of Total Return I USD = 0.78%* (March 31 2021 to March 31 2022)

*Past performance is not an indicator for future return. The return is net of a management fee of 1.25%. This does not include any trading fees.

This portfolio is trailing the performance of an equal weighted portfolio made up of global equities and global fixed income.

We can attribute that to the PIMCO Investments Grade Credit Fund that is held in this portfolio, it’s a higher risk bond fund that has experienced greater volatility YTD. When viewing this position over 10 years we see this pattern, it tends to outperform on the way up and underperform on the way down.

We are reviewing a lower volatility PIMCO bond fund as possible replacements to this PIMCO Credit Fund, although no decisions have been made on this yet.

Summary

We sympathise if you’re feeling a little exhausted by 2022 – we feel this too. It’s been a challenging start to the year, culminating from a difficult few years in the US.

But there are brighter times ahead and if you look hard enough (beyond the fear driven news cycle), there’s a lot of positive economic conditions; there’s an abundance of jobs, rising wages and consumers have the best balance sheets in 40 years.

The crises that face us are only temporary states, and these too shall pass.

If you want to find out more, please get in touch at +1 646-201-4865 or info@planfirstwealth.com

Plan First Wealth is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.